More devolution before tax increase, warns Scottish think tank

Scotland needs more powers to be devolved before income tax can be increased, a think tank has warned.

Reform Scotland has urged the Scottish Government to resist increasing income tax until it has control over additional levers such as VAT and corporation tax.

Finance Secretary Derek Mackay is widely expected to announce tax rises when he sets out his draft budget at Holyrood on Thursday in a bid to raise more cash for public services.

First Minister Nicola Sturgeon has already set out four alternative options which would see “modest” rate rises for higher earners, indicating that those on salaries of more than £31,000 could be affected.

The options include having anything up to six income tax bands, with three of the four featuring a 50p additional rate and incremental changes to the basic and higher rates.

The approaches could raise between £80 million and £290 million in additional revenue.

But Reform Scotland called for income tax to be pegged to the Westminster level until more powers are devolved, arguing that “coherent” reform is not possible while the Scottish Parliament still raises only around 40 per cent of what it spends.

The organisation said there was a “disproportionate dependence” on income tax, which accounts for around two-thirds of all the tax raised by Holyrood.

Chairman Alan McFarlane said: “Altering the income tax rate to make it different from Westminster, far from being beneficial, could be detrimental to Scotland’s economic performance and lead to a drop in revenue available to spend on public services.

“The Scottish Government has itself acknowledged the potential for adverse behavioural change in response to income tax policies. We need more tax levers to equip us to introduce coherent reform.”

Meanwhile a Survation poll of 1,006 adults for the Sunday Post found that almost half backed a rise in income tax to raise money for public services, with 28 per cent opposed and the remainder saying they either did not know or did not care.

But when asked what the government should do first to provide extra cash for public services, 61 per cent backed a spending review and 22 per cent said income tax should be raised while the remainder said neither or didn’t know.

The minority SNP government will need to win the support of either the Liberal Democrats or the Greens to get its budget through the Scottish Parliament.

The Lib Dems want to add 1p to the basic, additional and higher rates while the Greens have proposed a four-band system which would see those on low incomes pay less and those on higher incomes taxed more.

Scottish Labour proposed increasing the basic rate and higher rate by 1p, and an increase in the additional rate to 50p, but the Tories have argued against raising tax in Scotland beyond the rates paid elsewhere in the UK.

A Scottish Government spokeswoman said: “The serious economic threat posed by Brexit, coupled with continuing UK Government austerity following the UK Government’s budget last month, means we are seeing increasing pressure on our public services, and the time is right for a discussion about how we protect these vital services.

“That is why we have started a conversation, including the publication of our discussion paper, to look at how best to use our income tax powers.

“Our income tax discussion paper outlined four key tests that we feel any change in income tax must meet. One of those was that, when combined with our spending decisions, any change in tax policy should support the economy.